Showing posts with label ncorporation. Show all posts
Showing posts with label ncorporation. Show all posts

Thursday, August 3, 2023

Promotion and Incorporation of Companies

"Promotion and Incorporation" of Companies

Key Points:

1.Meaning of Promotion.
2. Definition of Promotion.
3. Meaning of Promoter.
4. Definition of Promoter.
5. Who are Promoters?
6. Types of Promoters.
7. Functions or Duties of a Promoter.
8. Rights of Promoters.
9. Liability of Promoters.
10. When the liability of Promoters Commences?
11. Preliminary Contract.
12. Legal Position.
13. Meaning of Incorporation.
14. Process of Incorporation.
15. Certificate of Incorporation.
16. Effects of Incorporation.
17. Commencement of business: section (11).

Link : https://smckk14.blogspot.com/2023/07/prevention-of-oppression-and.html

 

Formation of Companies:

Company is an artificial person created by law. So it cannot be created instantly. It requires various legal formalities which is a long process.

From an idea to estimate a company to commencement of business, there are three steps -

(i) Promotion, (ii) Incorporation and (iii) Commencement.

A private company requires first and second steps only to commence business. While the public company has to follow all three steps to commence of business.

1.Meaning of Promotion:

(Dictionary meaning Film promotion, Job promotion)

Promotion means 'start'. This is the first step towards formation of a company.

Idea - Collection of resources with abilities - Experts etc.

Promotion is process in which the journey of formation of a company starts with an Idea and includes all the formalities /works till the company is formed in real.

2. Definition of Promotion:

According to Professor ES Mead - 'Promotion involves four elements - Discovery, investigation, assembling and financing'.

According to CW Gerstenberg - 'Promotion maybe defined as the discovery of business opportunities and the subsequent organisation of funds, property and managerial ability into a business concern for the purpose of making profits therefrom'.

3. Meaning of Promoter:

Promoter means a person, partner, company or any group of a persons who do the work of promotion. Promoter is a person who generates the idea of formation of a company in his mind and take necessary steps to convert the idea into reality. He investigates about business, forms of a company according to a fixed plan, assembles necessary resources and performs preliminary expenses. He takes the complete risk because if company gets failed, he would have to bear all the losses.

4. Definition of Promoter:

U/s 2 (69): Promoter means a 'person' -

(i). Who has been named as such in a prospectus or is identified by the company in the annual return referred to in section (92). or

(ii) Who has control over the affairs of the company directly or indirectly whether as a shareholder, director or otherwise, or

(iii) In accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act.

Provided that nothing in the sub clause (c) shall apply to a person who is acting merely in a professional capacity.

According to Francis Palmar - 'Promoter means a person who originates a scheme for the formation of a company, has the memorandum and articles get prepared, get them registered, and appoints the first directors, settles the terms of preliminary contract and prospectus, if any, and make arrangements for an advertising and circulating of the prospectus and placing the capital.

5. Who are Promoters?

A promoter does the work of formation and incorporation of the company and is responsible as a promoter under provisions of Companies Act. It is not mandatory for a promoter that he should take part directly or completely in promotion of company.

Advocates, Chartered Accountant, Legal Experts and Accountants are not promoters because they do not take part in the process.

(i) Promoters Need not be a Person -

Not necessary that a person, or group of persons a firm, incorporation, originations maybe promoters. At present, generally companies perform the work of promoter.

(ii) Need not be a Partner in Proposed Company –

He /they can receive remuneration but in practice generally the promoters participate in the company by accepting the post of managerial post or director.

(iii) Being a Promoter Depend upon Facts –

Any person is a promoter of a company or not, is a matter of fact. In each case, by reviewing the circumstances, it is decided. If a person gets Incorporation of company as a chief person or assists in promotion, he cannot get rid of responsibility that the works had been done by his representatives. This is to be noted that person doing the work of promotion in the capacity of a professional cannot be called promoters. e.g. lawyer, printer and publisher of a prospectus, accountant, chartered accountant, engineers. One who assists in promotion only, can be promoter.

6. Types of Promoters:

(i) Professional Promoters -

They promote (establish) a company and handover to the shareholders. there are many professional Promoter in India to promote a company.

(ii) Occasional Promoters -

Their main profession is not to promote a company but other business. sometimes they promote a company. e.g. Engineer, Architect, Lawyer etc.

(iii) Financial Promoters -

Some financial companies take up the work of promotion depending on situation of the market. They do so to earn financial profits and provide financial assistance too.

(iv) Technical Promoters.

7. Functions or Duties of a Promoter:

(i) Idea in mind.

(ii) Thinking about initial problems - Place of business, Labour, Raw materials, Power, Market etc.

(iii) Determining deciding Name, Objects and Capital and Place of business.

(iv) Finding the signatories of MOA - Private minimum 2, public 7.

(v) Appointment of first Directors.

(vi) Appointment of Legal advisors, Bankers, Auditors etc.

(vii) Preparing important documents.

(viii) Payment of preliminary expenses.

(ix) Contract with underwriters.

(x) Issue of prospectus - Prepare printing and issuing.

(xi) Obtaining license - If needed.

(xii) Application to Stock Exchange.

(xiii) Obtaining Certificate of Incorporation.

(xiv) Obtaining Certificate of Commencement of Business.

If promotion of a company, is to be performed by purchasing any existing business, then dealing with buyers of Assets and selling of assets with mutual agreement.

8. Rights of Promoters:

(i) Right to Receive Preliminary Expenses -

Expenses incurred in connection with promotion are called preliminary expenses. e.g. - Preparation of MOA and AOA, Advertisement, Fees to Legal advisor, Primary investigation etc. They can get back the amount of preliminary expenses under AOA of company by submitting necessary documents but cannot file suit against the company because (i) There was existence of the company before incorporation, (ii) In case of nonexistence of the company, there cannot be any contract /agreement between company and promoter (s), (iii) If there is no contract, no liability of payment arises.

(ii) Right to Receive Proportionate Amount from Co-Promoters –

If due to any misstatement given in prospectus, anyone of the promoter has to indemnify, he can recover the proportionate amount from co-promoters because promoters have joint and separate liability towards company.

(iii) Rights to Receive Documents -

Promoters are allotted to receive the amount spent by them on incorporation and formation of the company, but in this regard, they cannot file a Suit against the company as long as there is such a contract between them and company after formation of the company. They can receive remuneration, through - (i) Commission on purchase price of business or assets (ii) Profit on assets (iii) Fixed amount (iv) Allotment of shares and debentures.

9. Liability of Promoters:

(i) To Disclose Secret Profits -

Promoters have fiduciary relationship with company. So it is expected not to earn any secret profits. If they have earned, it has to be disclosed and returned to the company with proper detail. If they do not do so and company comes to know, the company can recover the Secret profit from them.

(ii) Liability in Purchase of Property -

If promoters induce the company to purchase any property or purchases property from the money of company, it is necessary for them to disclose important facts to the company. If any property is purchase without disclosing important facts and details and company bears any loss due to it, the promoters will have to reimburse the loss.

(iii) Liability for Default in Prospectus -

If there is only statutory error in prospectus due to carelessness of promoters, the promoters will be liable to shareholders.

(iv) Liability for Misrepresentation or Fraud in Prospectus - To shareholders.

(v) Liability in case of Death - His assets are liable for his work done.

(vi) Liability in case of Insolvency - Amount of liability can be recovered from assets.

(vii) Liability for works done before Incorporation -

Personally liability for preliminary works. if after incorporation, the company approves the works of promoters, they are released from their liability.

(viii) Liability on report of official liquidator -

If at the time of liquidation of company, the official liquidator submits report to the court, the promoters have done fraud in promotion, the court may order for public enquiry. If fraud guilty, they will be liable.

(ix) Liability for Breach of duty - In case of loss, liable

(x) Liability in case of promotion - Liability for all the works.

(xi) Liability for offence -

If they violate the provisions of Companies Act, 2013, they will be liable financially and punishable offence. e.g. misrepresentation or fraud in prospectus, maybe fined or imprisoned or both.

10. When the liability of Promoters Commences?

Liabilities starts as and when the works of promotion gets started. but to be noted that this liability arises only when the company is Incorporated.

11. Preliminary Contract:

These are the contracts which are done by on behalf of company before Incorporation.

12. Legal Position –

Promoters are personally liable for preliminary contract. A promoter is neither an agent nor a Trustee of a company. He acts in a fiduciary position towards the company. He takes steps for the formation of the company and incurs the preliminary expenses for incorporation of company like registration expenses, payment of stamp duty, professional fees etc. The persons with whom the preliminary contract were made cannot file a suit against the company because at the time of making contract, there was no existence of the company. Such contract cannot even be rectified because nobody can rectify that contract. Which were done before coming into existence. If the company after its registration decides to accept the contract made by promoters with vendors, then it will make a fresh contract directly. Thereafter, promoters will be relieved from their liability and company will be liable for that contract. This new contract with company will eliminate the old contract done with promoters.

Second stage

Incorporation of company: under section (7):

13. Meaning of Incorporation:

Registration of a company under section 2 (20), of Companies Act is called Incorporation. Legal existence of a company comes after incorporation. A company is treated as an artificial person only after incorporation and its existence becomes separate from its members.

14. Process of Incorporation:

(1) Preliminary process:

(i) Determining name of company -

First decide then confirm with ROC about availability. For this an application with prescribed fees is send to ROC. If the proposed name is similar to the name (s) of any existing company, ROC rejects. Name should not be objectionable as per Central Government. After scrutiny, ROC send reply within 7 days. After getting approval, company must be incorporated within 6 months. If not done so, that name maybe allotted to other company by ROC.

(ii) Determining place of registered office - Name of state.

(iii) Preparing agreements.

(iv) Preparing MOA and AOA.

(v) Appointment of experts – Advocate, Engineer, Charted Accountant, Agents, Underwriters, Financial Advisor etc.

(2) Submitting the document to the ROC –

An application form should be annexed with following documents –

(i) MOA or Memorandum of Association –

This is the most important document of the company also known as constitution of the company. Every company has to prepare it and has to submit in ROC office. In MOA name of company, place of registered office, main and incidental object, liability of members, capital are mentioned. in case of public company, signature minimum of 7 persons and in case of private company signature of minimum 2 done in MOA. It is printed, divided into paragraphs, serially number and signed by members. Stamp of required value is must. Value of stamp vary from state to states.

(ii) AOA or Article of Association –

In AOA, rules for systematic operations of the business, to obtain the objectives of MOA are mentioned. It is also signed by those persons who have signed in MOA. To be noted that preparation of AOA in all types of the companies and submitting to the ROC is not compulsory. If a company limited by shares does not prepare its AOA then rules of schedule ‘F’ will be applicable on the company. At the time of submitting MOA to ROC, if AOA has not been made, it should be marked with ‘registered without articles’. Making and submission of AOA is compulsory for private company, unlimited company and companies Limited with guarantee.

(iii) Contract Relating to Appointment of Managerial Personnel –

If the company resolves to appoint a person as Managing Director, Whole Time Director or Manager, contract of appointment must be presented before ROC.

(iv) List of Directors –

In this list, names, addresses and other details of those person are to be given who are ready to become a director in the company. This is not compulsory for a private company. In case of public company, there must be particulars of minimum 3 persons.

(v) Written Consent of Directors –

Must for public company but not must for private company.

(vi) Notice of Registered Office –

Along with other documents, information about registered office is also sent. This information maybe send within 30 days of Incorporation.

(vii) Prescribed Fee –

Prescribed amount of registration fees should also be sent. This fees is based on capital of the company. Fees are given in 2013. The fees is deposited into RBI government account. In addition to registration fees, filing fees is also charged.

(3) Verification of Documents –

(a) Issue of receipt of receiving the document and registration fees.

(b) Verification of MOA and AOA –

(i) Name of company is appropriate or not.

(ii) Objectives of MOA should not be illegal and against public policy.

(iii) Signatures on MOA and AOA. In case of company with share capital, each signatory must take at least one share. Signs of signatories must be authenticated by such person who is not member of company.

(c) Verification of a document.

(d) Return of document in case of default.

(4) Issue of Certificate of Incorporation –

When Registrar is satisfied with all the documents submitted for incorporation, he incorporates the company and issues a certificate of incorporation. In this regard, following provisions exist –

(i) Incorporation cannot be denied by ROC after completion of all conditions.

(ii) Writ petition can be filed on refusal by ROC.

(iii) Registration - Issue of Certificate of Incorporation.

15. Certificate of Incorporation:

After registration the ROC issues a certificate under his signature and official seal that the company has been incorporated and (in case of limited liability Company) it is a company with limited liability. This certificate is known as "Certificate of Incorporation".

Following points are given in certificates(i) Full name of company (ii) Liabilities of members (iii) Date of issue of certificates (iv) Amount of stamp duty (v) Official seal of ROC and (vi) Signature of ROC.

16. Effects of Incorporation:

(i) Company becomes an incorporated organisation.

(ii) Date of company coming into existence is the date of issuance of certificate of Incorporation.

(iii) Contract between company and its members through MOA and AOA.

(iv) Separate legal entity.

(v) Pre Incorporation Contract –

Company is not bound to accept pre incorporation contracts and if they are accepted, there must be fresh /new contract.

(vi) Perpetual Existence –

After Incorporation, the company becomes of permanent existence and it is not affected by death, insanity or insolvency of any member.

(vii) No Dispute in Relation of Existence –

After incorporation, no one can challenge the existence of it in the court.

(viii) Effects on Creditors –

After incorporation, creditor can file suit against company to recover their money.

(ix) Funds payable by members is considered to be loan of company –

After incorporation, under the provisions of MOA and AOA, any amount payable by members is treated as loan of the company.

(x) Incorporation will not be void due to Irregularity of Pre Incorporation –

If after incorporation, it comes to the knowledge that there were some discrepancies in the process of incorporation, in such a case incorporation would not be void. Certificate of incorporation is a conclusive prove that incorporation is valid.

Once the certificate of incorporation is issued, it cannot be declared invalid. But under provisions of Companies Act, company may get liquidated.

Stage 3

Commencement of business: section (11)

17. Commencement of business: section (11):

(i) Any company with share capital shall not exercise the power of purchase of business or borrowing powers, until –

(a) One director shall file a declaration to ROC that every subscriber of MOA has paid the amount of shares taken by them and in case of public company paid up share capital, is not less than ₹ 5 lakhs and in case of private company is not less than ₹ 1 lakhs.

(b) The proof of registered office has been submitted to ROC.

(ii) If any violation is made in compliance to this section, the company shall be punishable with penalty of up to ₹ 5000 and every officer shall be punished at the rate ₹ 1000 per day, till the default continues.

(iii) If after incorporation within 180 days, the declaration is not filed to registrar and the registrar comes to know that the company is not commencing its business, the registrar may initiate the procedure to eliminate the name of company from the register of company. 

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